BUSINESS CORRESPONDENT MODEL: A STUDY OF DEMAND AND SUPPLY SIDE ISSUES IN JAMMU AND KASHMIR STATE

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1 Journal of Management (JOM) Volume 5, Issue 6, November-December 2018, pp. 1 12, Article ID: JOM_05_06_001 Available online at ISSN Print: and ISSN Online: BUSINESS CORRESPONDENT MODEL: A STUDY OF DEMAND AND SUPPLY SIDE ISSUES IN JAMMU AND KASHMIR STATE Varun Abrol Assistant Professor, School of Business Studies Central University of Jammu, India ABSTRACT Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society.it is a very important aspect for socio-economic development in India. Khan commission which was set up by RBI in 2004 to look into financial inclusion in India. Recommended that banks to review their practices and align their objectives in line with financial inclusion. On the recommendation of the committee Banks adopted business correspondent model to achieve financial inclusion goals as opening brick and mortar branches was not economically viable for banks. Business correspondent model since then was widely adopted by banks but much hyped model could not deliver as expected. Literature on the topic suggests many reasons for the problem which include Demand and Supply side issues. This paper reviews Business Correspondent model in Jammu province of J&K state to understand the demand and supply side issues of the model and suggest measures for effective working of the model. For the purpose of the study 4 districts of Jammu province were undertaken namely Jammu, Doda, Udhampur, Kathua. 50 Service providers of SBI and J&K bank were interviewed for the study. Demand side covers 400 respondents from the above said districts. The study reveals that Business correspondents are facing many problems regarding support from parent bank, technology used and commissions paid to the agents. Whereas demand side issues include financial illiteracy, lack of trust, technology problem and lack of necessary services provided. Key words: Business Correspondents, BC Model, Financial Inclusion Cite this Article: Varun Abrol, Business Correspondent Model: A Study of Demand and Supply Side Issues in Jammu and Kashmir State, Journal of Management, 5(6), 2018, pp INTRODUCTION Business correspondent model was introduced in the year 2004 to overcome the limitation of opening of brick and Mortar branches due to non-profitability. State Level Banking Committee (SLBC) has been established which is headed by a lead bank in every state. The SLBC guides a Financial Inclusion Plan in which targets are given to banks in which banks have to cover the unbanked villages under the umbrella of financial availability to improve 1 editor@iaeme.com

2 Varun Abrol the socio-economic status of marginalised ruralites. It includes appointing business correspondents to the villages in order to meet the financial needs of the poor to bring them into mainstream development. Business correspondents provide basic financial services like opening accounts, small financial transactions, assisting loan services and other basic financial services. Business correspondents are appointed as bank agents to provide banking services in the rural areas on commission basis. Basic services provided by the business correspondents are opening Basic savings bank deposit account, remittance services, loan application forwarding. Business correspondents are linked with a branch which acts as their home branch and provides are the necessary facilities. Business correspondents are linked with banking software to make remittance. Technical support and fixed remuneration is also provided to the BC s by the corresponding banks. Despite all the facilities this model could not perform as expected, for the purpose of finding the reasons of nonperforming of this model the present study was undertaken in the 4 districts of Jammu province namely Jammu, Doda, Udhampur, and Kathua. Business correspondents of J&K bank and SBI bank were interviewed to find out the problems faced by them in delivery of service. A total of 50 business correspondents across province were interviewed. 2. LITERATURE REVIEW (Subbarao, 2009) cites business correspondent model as most important initiative of RBI towards achieving financial inclusion. The BC model bridges the demand and supply gap in financial service delivery to people. In 2006, banks were given authorisation by RBI to avail services of NGO s, MFI s, retired bank employees and ex-servicemen as business correspondents. (Kamath, 2007) stated the importance of branchless banking in expanding the reach of financial services. He stated two major models viz e-banking and BC model for the same. (Kapoor et al. 2012) studied various supply side issues of BC model by interviewing BCNM s Business Correspondent Network Managers, the companies responsible for operating BC model in India. Study suggests to achieve sustainability of BC model support from banks with regard to increased commission, support for marketing, faster payment of commission and expansion of range of products offered is required. (Handoo, 2010) suggest branchless banking model such as appointing banking agents as business correspondents is a cost effective measure to extend the outreach. (Dasgupta, 2009) suggests the introduction of business correspondents has reduced the barriers to financial access by providing financial services in a cost effective manner. (Garg et al. 2016) suggests in order to reduce the demand and supply gap in financial services delivery, more business correspondents should be appointed and post offices be optimally utilised by acting as Business Correspondents. (Jessica et al. 2014) studies Business correspondent model in India and found that there is dissatisfaction among the agents appointed due to non-recognition from banks and delayed payments/commission from the bank. (SIDBI, 2014) in their report on BC in Bihar stated many issues in the model, lack of basic infrastructure like high speed internet, frequent power cuts created hurdles in effective service delivery. Moreover high attrition rate was found among agents appointed because of dissatisfaction among them due to non-payment or delayed commission from banks. Lack of support from the banks also added to the misery of the agents appointed. (Chopra et al, 2012) suggests the stickiness of the customer accounts opened by BC. Linkage of value added services like insurance, electronic benefit transfer, recurring deposits etc. to the no frill accounts opened will result in increased usage of these accounts. Sustainability of BC model can be increased by generating profits through these accounts. (Grameen Foundation, 201) in their working paper on BC discussed the operational challenges faced by the agents in the field. The basic product offered by BC s is the no frill account, which fails to attract the customers as for all other banking services a customer still has to visit a bank branch. In their suggestion they mentioned diversification of 2 editor@iaeme.com

3 Business Correspondent Model: A Study of Demand and Supply Side Issues in Jammu and Kashmir State portfolio offered by the BC s. Further high charges for services and lack of awareness among people is mentioned as a constraint in the objective of bridging the demand and supply gap of banking services. The role of business correspondents is pivotal in extending the reach of banking services. Engaging more business correspondents can ease the burden of opening bank branches in the areas where profitability is less. (Damodaran et al. 2012) suggest post offices to act as business correspondents keeping in view the diverse network of post offices that we have in our country. (Singh et al. 2014) suggest utilization of existing resources like fair price shops, public distribution systems, Indian post offices for banking services delivery. (Raj et al. 2011) suggest BC model as one of the profitable model for financial inclusion in the country. (Garg et al. 2016) has also suggested the expansion of business correspondent model the country for better service delivery.. NEED FOR THE STUDY Achieving complete financial inclusion is the mission of government for which many initiatives have been taken. Appointing business correspondents is one of them. BC model is an essential model of service delivery as it caters to the rural areas where opening a brick and mortar branch is not a profitable venture for commercial banks. Some banks have open ultrasmall branches from where business correspondents operate. Recent studies done on business correspondent model in different parts of the country highlight some issues in the model. Both demand and supply side issues are there in this model. The BC model is not working efficiently as expected initially by policy makers. The present study is undertaken in the state of Jammu and Kashmir where geographical disadvantage is there and opening of bank branches in some areas is not viable. For providing banking services in such areas business correspondents have been appointed by the banks as directed by JKSLBC Jammu and Kashmir state level banking committee to cover different SSA sub service areas. The purpose is to provide access to banking services in these areas for complete financial inclusion. The study thus undertakes the objective of studying the working of BC model in the area and to find the demand and supply gaps in the model. Further suggestions for better working of the model will be provided after analysing the ground situation. 4. OBJECTIVES OF THE STUDY To study the impact of Business Correspondent model on Socio-economic welfare of the people. To study the demand and supply gaps in Business correspondent model. To suggest measures for improvement in working of Business Correspondent model. 5. METHODOLOGY For the purpose of the study two different structured questionnaires were designed. One questionnaire records the responses of people who are availing services of business correspondents to understand the demand side issues gaps. The other questionnaire records the responses of service providers i.e. agents to understand the problems faced by them in service delivery which covers the supply side of the model. The scale was development keeping in view the services offered by the business correspondents and the services expected by people from business correspondents. The questioned framed in the questionnaire included parameters like assistance in account opening, transaction and availing loans, convenience of banking services through BC s and easy availability of the services. editor@iaeme.com

4 Varun Abrol 5.1. Multiple Regression Analysis In order to estimate the impact of business correspondent model, regression analysis was done to find out the relationship between socio-economic welfare and service availability through business correspondents. The regression estimates indicate significant impact of business correspondents on socio-economic welfare with beta coefficient However the relationship between business correspondents and socio-economic welfare tends to be weak with R square estimate of Table 1 Multiple Regression analysis Model R R Square Model Summary Adjusted R Square Std. Error of the Estimate 1.01 a a. Predictors: (Constant), av bc Model ANOVA a Sum of Squares df Mean Square F Sig. 1 Regression b Residual Total a. Dependent Variable: av. Welfare b. Predictors: (Constant), av bc Coefficients a Model Unstandardized Coefficients Standardized Coefficients B Std. Error Beta 1 (Constant) av bc a. Dependent Variable: av. Welfare Y = a+ bx 5.2. Socio-Economic Welfare= Services Offered through Business Correspondents The business correspondent network of banks is at par with the number of brick and mortar branches of the banks. In Jammu and Kashmir there are about 1445 business correspondents appointed and 2028 brick and mortar bank branches are operating. Business correspondent model was launched with a hope to increase the access to financial services in the rural areas where opening a commercial bank branch is not feasible due to geographical or economic reasons. The model however has not been able to perform as desired. The regression results also show a weak relationship between business correspondent model and socio-economic welfare. Many reasons lead to this weak relationship. Mostly supply side issues address to this weak relationship. The services provided by the business correspondent are limited in nature and a customer has to visit a bank branch for banking services. Business correspondents appointed provide assistance in opening a bank account with a bank branch with which they t Sig. 4 editor@iaeme.com

5 Business Correspondent Model: A Study of Demand and Supply Side Issues in Jammu and Kashmir State are linked. However there is a delay in opening such accounts by the branch as these accounts are no frill accounts with no commercial benefit to the bank branch. Moreover a limited transaction services are provided by the business correspondents with is dependent on the infrastructure like high speed internet and a sensitive biometric device. Lack of infrastructure poses a problem in service delivery. Figure 1 Path Coefficients Figure 2 Path Estimates Business Correspondents to Socio-Economic Welfare 5 editor@iaeme.com

6 Varun Abrol Figure 2 depicts the relationship between availability of services through business correspondents and socio economic variables like education, savings, income and quality food. The relationship between availability of services through business correspondents and socio economic variables is significant but explanatory power is not strong among these variables. Hence it can be interpreted that there is no significant upliftment of socio-economic status of people who avail the financial services through business correspondents. It can be observed from the table 2, the t-values are above 1.96 which is an indication of statistical significance of results between socio-economic variables and availability of services through business correspondents. Previous researches indicate the potential of business correspondent model in extending the reach of financial inclusion, but due to demand and supply issues, this model has not been able to deliver results as desired. Table 2 Structural Model Assessment Exogenous variables-> Endogenous variables P.Estimate P.Value t-value Education->BCS Savings->BCS Income->BCS Quality food->bcs To understand the supply side issues of business correspondent model responses from 50 business correspondents were taken about the problems faced by them in delivering the services to the people. Most of the business correspondents who are working as commission agents of banks faced similar problems like infrastructure issues, high speed internet was not available to perform transactions in the rural areas. The biometric devices provided to them by banks were not sensitive enough to read the biometrics of the customer, which results in multiple tries for a single transaction. Much recognition was not provided to them by the home branches and there were delay of 6-8 months in opening accounts by banks which were sourced by them leading to frustration among the customers which in turn decreases viability of business correspondents among the customers who prefer to go to a bank for a banking service rather than visiting a business correspondent. A limited bouquet of services were offered by the business correspondents, for all other services a customer still has to visit a bank branch. A limited number of transactions were allowed per customer in the accounts sourced by BC s more over there is a limit to the amount of remittance in these accounts which results in dissatisfaction among the customers. Business correspondents work on commission basis for the banks, the amount of commission provided to them was minimal which could not cover even the initial investment done by them, moreover delay in commissions provided added to the dissatisfaction among the business correspondents. All these factors result in low performance of BC model. 5.. Supply Side Issues in Business Correspondent Model In order to understand the supply side issues in business correspondent model, responses from 50 business correspondents were collected. A structured questionnaire was prepared for the purpose of collection of responses. The data was collected on the various services provided by business correspondents. The business correspondents taken for the study are appointed by State Bank of India and Punjab National Bank in different areas of the state. The questionnaire also assess the satisfaction of Customer Service Providers (CSP s) and different problems faced by CSP s in service delivery. Major challenges faced by business correspondents and operational issues are highlighted through this objective. 6 editor@iaeme.com

7 Business Correspondent Model: A Study of Demand and Supply Side Issues in Jammu and Kashmir State 6. KEY FINDINGS Out of various financial services available the business correspondents appointed are authorized to offer only two services. The CSP s can open a no-frill basic savings bank account and provide remittance services in the account with a maximum limit of Rs per account. For any other banking service a customer still has to visit a bank account which dilutes the basic purpose of providing a business correspondent service in the rural areas. Multiple problems are faced by business correspondents with regard to liquidity of cash as remittance services provided by the business correspondents are paid by them out of deposits in the day. The gap between deposits and withdraws is huge some days and a CSP has to cover the gaps by himself. It increases the risk of business correspondents in terms of cash involved. The service provided by business correspondents is dependent on the technology. In the rural areas the internet connection is poor to support the banking software. Moreover limited technology support is provided by the banks to the CSP s appointed which adds to their service delivery problems. The finger print censor provided by the banks are not sensitive enough to read the finger prints of the customers and multiple attempts have to be made for a single transaction. The remuneration provided to business correspondents is minimal. The commission provided to the business correspondents is delayed for longer periods and business correspondents find it difficult to cover even the initial cost of setting up the infrastructure. The bank accounts sourced by the business correspondents are delayed for 4-6 months by the bank branches which adds to the frustration of customers. The credibility of business correspondents is reduced as people do not find business correspondents reliable source or as an alternate to the branch banking. Financial literacy is an important aspect when it comes to providing banking services through business correspondents. Making people aware of CSP s as an alternate to banking services is important. Financial literacy camps organized by the business correspondents make people aware of the services available through them. There is need to educate people about the various services available through CSP s. Problems Faced by BC Financial Literacy 48 Cash Management 62 Remuneration 96 Limited Services 72 Technology 78 Recognition Figure Problems faced by Business Correspondents in Service Delivery Out of 50 business correspondents covered in the survey 96 % stated delayed remuneration/commission as a problem faced by them in effectively providing services. 88% 7 editor@iaeme.com

8 Varun Abrol stated non-recognition from bank branch and delay in opening accounts sourced by them as a major problem faced by them. 78% of the business correspondents feel technological issues hamper their work as internet connectivity is weak in rural areas, doing transactions is a problem. 72 % respondents feel that limited bouquet of services provided by them to the customers is a problem as for other banking services the customers have to visit a bank branch which dissolves the sole purpose of appointing a business correspondent. 62% respondents stated cash management issue as a problem in day to day operations as they have to manage withdrawals from the deposits they get in the day. Most of the days withdrawals are more than the deposits which poses a problem to them as their personal money gets involved which has to be reimbursed from their service agent. 48 % respondents feel lack of financial literacy in the customers is a problem in motivating customers to avail banking services through business correspondents, some customers also hesitate to avail services through them as money is involved and people do not trust business correspondents with their money. Banking Services Provided by BC Loans Remittance KCC GCC OD FD RD Savings Account Figure 4 Banking Services provided by Business Correspondents Accounts Opened by BC Figure 5 Number of Accounts opened by Business Correspondents When asked about the different banking services provided by the business correspondents to the services it was found that the CSP s are allowed to open basic savings bank accounts known as no-frill accounts and can provide remittance services up to a certain limit per 8 editor@iaeme.com

9 Business Correspondent Model: A Study of Demand and Supply Side Issues in Jammu and Kashmir State account in a day. With only limited services allowed business correspondents find it difficult to attract customers to them for availing banking services When asked about number of bank accounts sourced the business correspondents were found to have opened accounts ranging from accounts depending upon the population catered and activeness of the respective business correspondent. On an average the business correspondent was found to have opened 86 accounts. As these business correspondent work on commission basis and with only limited services allowed to offer it can be figured out that the earnings of the CSP s would be very less and most of them not able to cover even the initial cost of setting up an office. FLC Organised by BC Figure 6 Financial Literacy camps organised by Business Correspondents Financial literacy is an important concern in financial inclusion as people need to be educated about the importance of having a bank account. Business correspondents in collaboration with parent branch organise financial literacy camps in their respective areas to educate people about the different banking services that can be availed by them through business correspondents without having to visit a bank branch. Business correspondents have organised financial literacy camps ranging from 2-6 in their respective areas which is quite less as the number of villages catered by a business correspondent ranges from -7. Hence more financial literacy camps need to be organised to inculcate the habit of using a bank accounts and to educate people about the benefits of having a bank account. One of the service which business correspondents offer is remittance in the accounts which includes credit and withdrawal. The number of transactions done by business correspondents in a day range from 2-7 which is quite less as compared to a bank branch operating in a rural areas which indicate the people have not yet accepted business correspondents as an alternate to bank branches for availing banking services. More efforts need to be done in this aspect to increase this number which will be beneficial for business correspondents as well as the customers availing the services. 9 editor@iaeme.com

10 Varun Abrol Transactions Per Day by BC Figure 7 Number of Transactions done by Business Correspondents per day 7. SUGGESTIONS AND RECOMMENDATIONS On the basis of observations in the field and result from analysis following suggestions are made to make BC model more effective and viable. Both demand and supply side issues are being addressed below. Recognition to Business Correspondents The business correspondents are appointed by different banks in areas allocated to them. The agents appointed are attached to the nearest bank branch of that bank for various services. Agents depend on the bank branch for all the assistance they need. Technical assistance if needed is also provide by the same branch. The accounts sourced by the agents are linked to the branch. Less importance is given to the business correspondents appointed by the banks and assistance is not provided to them when needed. Accounts sourced by them are not opened on time and there is delay of months in opening the accounts as the accounts sourced are no frill accounts which are not profitable for the banks and are treated as operational liability that s why they are delayed. Timely payment of Remuneration/ Commission to the agents Business correspondents appointed by banks work on commission basis. They get commission on the basis of accounts sourced and transactions done in accounts by them. Their commission is minimal and is delayed for months which discourages the agents. The appointed agents are usually ex-service men or retired government employees with limited sources of income. The delayed payments add to their miseries. This factor has increased the iteration rate among the BC s Providing infrastructure to the BC appointed BC model run primarily on ICT mode. The agent appointed is given access to the accounts linked to the home branch so that he can do transactions from a remote location.an initial set up is required for opening up a centre which primarily include a computer, power back up, high speed internet, finger print reader, printer and some basic furniture. The initial infrastructure is set up by the agents which involves a lot of investment. To cover this investment over a minimal commission is not possible for the agents, hence initial 10 editor@iaeme.com

11 Business Correspondent Model: A Study of Demand and Supply Side Issues in Jammu and Kashmir State infrastructure should be provided by the concerned banks which would ease the financial burden on the agents. Widening of portfolio provided by the agents The business correspondents appointed are allowed to offer limited services. They are accessed to open only no frill accounts and do transaction up to a certain amount at their end. With business correspondents providing limited services people are forced to go to bank branches for all other services. The primary purpose of appointing business correspondents is lost if a customer has to visit a bank branch for services. The agents should be allowed to open recurring deposit and fixed deposit accounts in addition to opening of bank accounts and provide other banking services to increase their importance in the field. Increasing the network of Business Correspondents Business correspondents work as an alternate to brick and mortar branch to provide banking services, hence their network should be increased to have an increased access to banking services even in remote areas. To increase the network existing infrastructure can be used. Indian post has a wide network in rural areas which can be used for the purpose. Retired post men can be appointed as agents and can use the post office infrastructure to provide the services. The PDS public distribution system network is also very strong in the country and is present in remotest villages as well. The PDS agents can be appointed by banks as BC to penetrate and make banking services more accessible. REFRENCES [1] Subbarao, D. (2009a), Financial inclusion challenges and opportunities, Speech Delivered by Dr Duvvuri Subbarao, Governor, Reserve Bank of India, Bankers club, Kolkata,December9 [2] Kamath, R. (Apr , 2007), Financial Inclusion vis-a-vis Social Banking, Economic and Political Weekly, Vol. 42, No. 15, pp [] Kapoor Raunak and Shivshankar V., State of Business Correspondent Industry in India The Supply Side Story, Micro Save, 2012 [4] Handoo, J. (2010), (2010), Financial Inclusion in India: Integration of Technology, Policy and Market at Bottom of the Pyramid, available at: [5] Dasgupta, R. (Jun Jul. 10, 2009), Two Approaches to Financial Inclusion, Economic and Political Weekly, Vol. 44, No. 26/27, pp [6] Verma, Y., & Garg, P. (2016). Pradhan Mantri Jan Dhan Yojana (PMJDY): A step towards eradicating financial untouchability. Indian Journal of Finance, 10 (1), DOI: /ijf/2016/v10i1/85845 [7] Renuka, B., & Jessica, V. (2015). BC Model of Financial Inclusion through Business correspondent s perspective DAWN: Journal for Contemporary Research in Management volume 2 issue 1 page 27-4 [8] [9] lysis_ueuw0tiyaso.pdf 11 editor@iaeme.com

12 Varun Abrol [10] Case-Study.pdf [11] Singh, C. et al. (2014). Financial inclusion in India: Select issues. IIMB Working Paper (474), 1-4. Retrieved fromhttps:// No. 474.pdf [12] Damodaran, A. (2012). Financial inclusion: Issues and challenges. AKGEC International Journal of Technology, 4(2), [1] B. Raj, (2011), Profitable Models for Financial Inclusion BANCON 2011 Selected Conference Papers. Available at SSRN: [14] Verma, Y., & Garg, P. (2016). Pradhan Mantri Jan Dhan Yojana (PMJDY): A step towards eradicating financial untouchability. Indian Journal of Finance, 10 (1), DOI: /ijf/2016/v10i1/ editor@iaeme.com